For Canadians, having an emergency fund can be a lifesaver.
But if you’re living paycheck to paycheck and struggling to make ends meet, you might think that you can’t afford to set up an emergency fund.
There is a financial strategy available exclusively for Canadians called The Smith Manoeuvre that enables you to set up an emergency fund without needing any extra cash.
This means that even if you are struggling to make ends meet, you do not need to worry about not having an emergency fund.
What is the Average Emergency Fund and Do You Actually Need One?
It is conventional wisdom and practice in Canada to set aside an average emergency find of 3-6 months of salary as a cash (or near-cash) in case there are unexpected emergencies or issues which crop up in life.
And crop up they will!
While likely everybody will agree that it is wise to have a emergency finds available for when it’s needed, not all agree on what the average emergency reserve amount should be or where it should be kept.
How Much Emergency Funds in Canada?
Let’s say I make $5,000 per month and feel a five months of emergency funds are sufficient for what may be thrown my way – maybe a loss of employment that I need to prepare for. A five month buffer is comfortable to me as I believe I should well be able to find new work before that five month reserve is depleted.
What this means is that I will have $25,000 in cash sitting in a bank (maybe high-interest savings account at 2%).
I love to look at the bank statement and see that $25,000 balance. It is comforting. It allows me to sleep at night. I know I can simply trot down to the bank and get my hands on it any time I want. I feel good knowing I am safe.
But what is it costing me?
Yes, it actually costs me – having that $25,000 sitting in cash earning next to nothing means you are likely losing out to the cost of inflation. So that $25,000 today is valued less than $25,000 one year from now. And even less two years from now…
Where to Invest Emergency Funds in Canada?
Meanwhile, I have a mortgage.
A big, burdensome mortgage that costs me a fortune. Not only does it take a couple thousand off my pay cheque each month, but the majority of the payment I make doesn’t even go toward my benefit in the least.
The amount I pay in interest goes directly to the bank as payment for me renting their money. And insult to injury, this great amount of interest I pay each month is not even tax deductible. Plus, any mortgage payment – both principal and interest components – is made with after-tax dollars.
So what am I getting at?
There is a better way to deal with your 3-6 months ‘emergency funds’ requirement than hoarding that money in a bank account in case you ever need it.
I’m going to take that $25,000 I already have saved up and make a prepayment against my mortgage, then re-borrow it to invest in real, growth-oriented assets to allow me to take advantage of newly-created tax deductions and the magic of compound growth.
For example, what’s that $25,000 at 2% in the HISA worth in 10 years? Just over $30,000. And if I am able to prepay my mortgage by that $25,000 tomorrow and get back at it to invest at 8%? In 10 years it will be worth just under $54,000. A big difference.
And that does not include the tax deductions that you will now start to earn.
Where to Keep My Emergency Fund in Canada?
But what about the emergency fund reserve?
If I have invested that $25,000 after running it through my mortgage (thereby reducing the time it takes to pay it out and also generating tax deductions) then isn’t it locked up? Yes and no. You could redeem $25,000 of assets or whatever amount you required for the emergency, pay tax (but only because you’ve made money) and take care of it that way, but you may consider leaving it invested for the long-term and simply having a personal line of credit on hand for emergencies. You don’t pay for it if you don’t use it; and if you have to, you will make the decision to pay it back over time or quickly with the investment assets at your disposal.
Get your ‘emergency funds’ working for you by reducing the time you’ll have expensive, non-deductible, mortgage payments, generating tax deductions, and earning a real rate of return by investing for your your future.
Build Your Emergency Fund with The Smith Manoeuvre: A Smart Financial Strategy for Canadian Homeowners
The Smith Manoeuvre is a creative and effective financial strategy designed for Canadian homeowners to build a secure financial future while enjoying substantial tax refunds annually for many years.
By converting non-deductible debt of a house mortgage to the deductible debt of an investment loan, this strategy not only ensures the speedy elimination of a non-deductible mortgage but also builds a free-and-clear non-registered ‘personal pension portfolio’.
With the potential to realize a benefit of approximately $400,000 or more over the life of a 25-year mortgage, The Smith Manoeuvre has become an increasingly popular way for Canadians to keep more of their money, reduce home ownership costs, and improve their overall financial security.
By implementing this strategy, homeowners can also maintain an emergency reserve fund to prepare for unexpected events and protect their financial stability.
